Working with a mortgage broker is a different experience than working with a bank specialist. It’s also a different part of the home buying process compared to working with your Realtor. Some people may have never worked with a mortgage broker before and don’t know what to expect. Because of that, there are some questions…Read Article
Should You Pay Off Your Mortgage Early?
Buying a property is considered a good investment if you can afford it. But for some, having a mortgage loan to pay off over 25 years can seem like too long. With this, you may be wondering whether or not you should pay off your mortgage early.
In this article, I discuss what happens when you pay off your mortgage in Canada, the pros and cons, and what accelerated mortgage payments would look like. Let’s get started.
Should you pay off your mortgage early?
I get asked a lot of questions on a daily basis. Whether different situations could work, whether or not someone will get approved for a certain amount from a lender, and whether or not a client should do accelerated mortgage payments to pay off the mortgage early.
And with every question, comes a different answer. Since being approved for a mortgage is such a personal situation and everyone’s circumstances and finances are different, all answers will be unique.
But, in a general sense, if interest rates keep climbing, it makes sense to pay the mortgage down faster. Here is why I think this is a good idea in 2022.
It saves you money.
The number one biggest reason to accelerate mortgage payments is because it will save you money.
When you make a payment on your mortgage, that payment is split into two parts: the principal and the interest. The principal is the amount you borrow and still owe. The interest is the fee you pay to the lender in order to borrow that money.
The interest is normally expressed as a percentage. This helps you and your lender figure out how much interest will be paid during the total lifetime of the loan amount. Currently, the most common amortization schedule in Canada is 25 years.
By reducing your amortization (the time it takes to repay the principal debt), you’ll save money in the long run.
For example: If you borrowed $500,000, and the amortization was 25 years with an interest rate of 3%, you would actually be paying $709,868 to the lender. That is if there are no interest rate increases in the next 25 years, which is not likely!
With this example, you have paid the lender $209,868 in interest on a $500,000 loan. If you were to reduce the amortization to 15 years instead of 25, you would shave $89,149 off the interest payment.
With reducing the amortization years, it will increase your monthly mortgage payments. If you can afford this, this is a pro of paying off your mortgage early – pay more now and have fewer bills later. But, if you’re unable to afford a larger monthly bill, don’t worry… there are other ways to pay off your mortgage early!
Accelerated or lump sum payments.
Did you know that you can make accelerated and lump sum payments towards your mortgage amount? This allows you to pay more against your principal, reducing your interest payments while shortening the length of time on your loan.
If this option is of interest to you, you just have to contact your lender directly to let them know this is your plan of action. They will provide you with more information on lump sum amounts or how to set up accelerated mortgage payments.
Using that money for your future.
The second reason why you would want to pay off your mortgage early in Canada is for financial freedom.When you pay off your mortgage faster, the money that you would normally be spending on payments can be put towards other things.
Consider investing that money through a financial advisor, put it towards retirement, or pursue those passion projects that you’ve been dreaming of like renovating a travel trailer. Help family purchase a home or save for your child’s education in the future, the choice is up to you with financial flexibility.
When not to pay off your mortgage early in Canada.
Like everything in life, there are two sides and sometimes it’s not the right time to pay off your mortgage early through accelerated mortgage payments. So, when shouldn’t you pay off a mortgage early? If you’re self-employed or run a business out of your home, it may not make sense to do accelerated payments. This is because a portion of your mortgage interest becomes tax deductible, and this deduction helps bring down your taxable income.
Secondly, if this mortgage loan is for an investment property, and you still have a mortgage on your primary residence, you may not want to pay off your mortgage early. If you’re an investor, you most likely will want to focus on paying off your mortgage on your primary residence first before tackling the mortgage on the investment property.
Interested in learning more?
Are you interested in learning more about mortgage payments and what’s right for your situation? Please reach out to me with any mortgage questions you have and I would be happy to guide you in the right direction for your situation. Give me a call at 250-826-3111, contact me through the form below or fill out an application on my website today!